Bupa Arabia for Cooperative Insurance Company Board of Directors Report for the period ended 31/12/2017G (13/04/1439H):

Transcription

1 Bupa Arabia for Cooperative Insurance Company Board of Directors Report for the period ended 31/12/G (13/04/1439H): The Board of Directors of Bupa Arabia for Cooperative Insurance Company (the Company, or Bupa Arabia) is pleased to present the Annual Board Report (ABR) covering the Company s financial results and achievements for the twelve-month period ended 31 December G. This ABR must be read in conjunction with the Company s stock exchange announcements, and the Annual Report & Accounts (ARA), which including the Annual Financial Statements (AFS) and, where not repeated herein, so as to avoid repetition, the contents shall be considered to include all Company announcements, the ARA, and all AFS contents, in fulfilment of the regulatory requirements of the ABR. All Bupa Arabia stakeholders are additionally referred to the Company website s Investor Relations section, for key information about the Company s results, governance, stock exchange announcements and General Assembly (GA) minutes. This ABR includes the most important developments, financial results, operational activities, and outlook disclosures, in compliance with the rules and regulations of the Kingdom of Saudi Arabia (KSA, or the Kingdom, or Saudi Arabia) and for comparative purposes uses the respective twelve month periods ending 31/12/G (13/04/1439H) and 31/12/2016G (02/04/1438H). 1. Activities: a) Main activities: Bupa Arabia is a publicly listed Saudi joint stock company (listed 17/05/2008G (11/05/1429H)) registered in Saudi Arabia under Commercial Registration number , issued 10/05/2008G (05/05/1429H). The Company specializes in cooperative health insurance activities and operates in accordance with the relevant rules of all the relevant regulatory bodies in the Kingdom. The Company s first fiscal period commenced on the issuance of the ministerial declaration to establish the Company (issued on 01/05/2008G (24/04/1429H)) and ended on 31 December 2009G. These financial statements, for the twelve month period ended 31/12/G (13/04/1439H) represent the ninth statutory financial statements of the Company. b) Third Party Administration (TPA) activity: As announced, on 01/01/2018G (14/04/1439H), Bupa Arabia signed a TPA Services Agreement with Saudi Aramco which entails providing TPA services to Saudi Aramco employees, retirees, and their dependents, effective from 01/03/2018G (13/06/1439H). During, as per requested TPA regulatory service requirements, Bupa Arabia commenced formalities to create the required TPA entity, for which final regulatory approvals/required formalities are expected to conclude during Bupa Arabia business results: was a challenging year; as a result of the economic environment as well as competitor pricing behaviour, which was particularly predatory in Q1. In this context we estimate that the total Saudi insurance market premiums declined slightly and that the Saudi health insurance market premiums increased by 2-3% in. This was driven by what we believe to be workforce shrinkage, down-trading and general resistance to any renewal price increases. Page 1 of 49

2 In the context of the challenges Bupa Arabia has delivered what it believes is a very robust financial performance, due to its sound financial management, as demonstrated by the relatively strong core operating results, and other positive outcomes during the year: an improved solvency position for the third successive year, sufficiently that we were still able to pay dividends of SR120m, Growth in Cash/Investments of SR0.4 billion, an increase of 7% versus the prior year, Cash/Investments SR1.5b higher than our Technical Reserves, reflecting a very strong liquidity position, achieved a loss ratio of 83.5%, an increase of only 2.9% versus the 80.6% of last year, despite medical inflation at a much higher level than this and not being able to pass on price increases, maintained the technical reserves ratios in line with prior years, achieved record customer satisfaction and net promoter scores, continued to invest in the business, in particular in systems, processes and governance. 2.1 Summary profit results: Statement of Insurance Operations 12 months 12 months months months 12 months Gross written premiums (GWP) 3,177,480 5,740,449 7,328,016 7,938,630 7,732,961 Net earned premiums (NEP) 2,604,458 4,595,075 6,739,398 7,667,316 7,672,314 Total revenue 2,620,260 4,626,554 6,766,363 7,747,595 7,772,006 Gross claims paid 2,074,049 3,289,128 5,007,697 5,944,793 6,428,617 Net claims incurred (NCI) 2,094,354 3,649,005 5,211,046 6,178,445 6,405,003 Total expenses 380, , , , ,084 Surplus from insurance operations 145, , , , ,919 Shareholders' net income 147, , , , ,614 NEP increased by SR5m, +0.1%, but the net underwriting result decreased by SR222m due to a deteriorating loss ratio. The net income decrease, mainly due to the higher loss ratio, was partially offset by lower operating expenditures, a significantly improved BDP and higher investment income compared to the previous year. Page 2 of 49

3 2.2 Summary balance sheets: INSURANCE OPERATIONS' ASSETS Cash and cash equivalents 232,267 1,384, , , ,384 Murabaha deposits 956,230 1,213,027 3,047,529 3,057,816 2,912,577 Investments 186, , , , ,776 Prepayments and other assets 27,892 70,815 91, , ,535 Premiums receivable - gross 462, , ,715 1,123,540 1,013,656 Allowance for doubtful premiums receivable (52,550) (77,858) (114,266) (142,997) (142,674) Premiums receivable - net 410, , , , ,982 Reinsurer's share of unearned premium Reinsurer's share of outstanding claims Deferred policy acquisition costs (DAC) 46,678 56,601 78,415 72,281 71,076 Total insurance operations' assets 1,915,988 3,566,544 4,361,496 4,921,382 4,949,506 SHAREHOLDERS' ASSETS Cash and cash equivalents 101, , ,297 93, ,500 Murabaha deposits 126,993 44, , ,494 1,032,806 FVIS investments 446, , , , ,914 Other receivables 1,319 1,746 3,563 17,445 12,993 Amount due from insurance operations , ,000 Goodwill 98,000 98,000 98,000 98,000 98,000 Furniture, fittings and equipment 43,059 60,667 77,167 90, ,497 Accrued Interest on statutory deposit ,585 5,121 Statutory deposit 40,000 40,000 80,000 80,000 80,000 Total shareholders' assets 856,969 1,162,290 1,791,812 2,234,076 2,582,831 TOTAL ASSETS 2,772,957 4,728,834 6,153,308 7,155,458 7,532,337 Page 3 of 49

4 INSURANCE OPERATIONS' LIABILITIES AND SURPLUS Unearned premiums (UEP) 1,323,069 2,383,358 2,890,679 3,094,990 3,091,079 Outstanding claims (OCP) 450, ,530 1,054,369 1,321,622 1,341,536 Reinsurance balance payable ,773,670 3,199,141 3,945,048 4,431,729 4,472,228 Accrued expenses and other liabilities 79, , , , ,984 Obligation under Long-Term Incentive Plan (LTIP) 14,751 22, ,867,534 3,485,363 4,207,197 4,603,021 4,610,212 Amount due to shareholders' operations Policyholders' share of surplus from insurance operations 48,454 81, , , ,581 Fair value reserve for available for sale investments Total insurance operations' liabilities and surplus SHAREHOLDERS' LIABILITIES AND EQUITY ,915,988 3,566,544 4,361,496 4,921,382 4,949, Accrued expenses and other liabilities 31,419 42,398 50,494 65,725 74,083 Accrued Zakat and income tax 35,000 23,903 42, , ,704 Amount due to a related party in respect of goodwill Accrued Interest on statutory deposit ,121 Amount due to related parties 59,490 44,490 32,201 24,344 33,586 Total shareholders' liabilities 125, , , , ,494 Share capital 400, , , , ,000 Statutory reserve 88, , , , ,025 Fair value reserve for available for sale investments (1880) Share based payment Shares held under Employees' Share Scheme (7,052) - (13,101) (23,404) (28,915) Retained earnings 249, , , ,625 1,030,887 Total shareholders' equity 731,060 1,051,499 1,666,540 2,027,054 2,321,337 Total shareholders' liabilities and equity 856,969 1,162,290 1,791,812 2,234,076 2,582,831 TOTAL LIABILITIES INSURANCE OPERATONS' SURPLUS AND SHAREHOLDERS' EQUITY 2,772,957 4,728,834 6,153,308 7,155,458 7,532,337 Investments and cash grew during, increasing by SR367m to SR5.9b, an increase of 7% from the 2016 close of SR5.5b. This followed the 2016 increase of SR500m, which was an increase of 10% compared to Premium receivables also declined, by SR110m, during the year, reflecting the stellar collection performance despite the difficult market environment. The Days Sales Outstanding (DSO) improved by 18%, a reduction to 18 days from 22 days versus the previous period. Page 4 of 49

5 3 3.1 Bupa Arabia financial highlights: Summary key performance indicators (KPIs): Description 2016 (12 Months) (12 Months) % Gross written premiums (GWP) 7,938,630 7,732,961 (205,669) (2.6%) Net earned premiums (NEP) 7,667,316 7,672,314 4, % Total expenses 923, ,137 (49,026) (5.3%) Total operating expense ratio 12.0% 11.4% (0.6%) (5.4%) Surplus of insurance operations 653, ,919 (150,030) (22.9%) Policyholders' share of insurance operations' surplus 65,395 50,392 (15,003) (22.9%) Net shareholders' income 630, ,614 (130,091) (20.6%) Weighted average no of ordinary shares (thousands)* 79,826 79,783 (43) (0.1%) Basic earnings per share (Saudi Riyals) * (1.63) (20.6%) Our GWP contracted slightly, by 3%, and we estimate that our total insurance market share closed at +/- 21%, versus the 21.6% of This was a strong performance in a challenging market; with many clients resistant to any increase in premiums, some laying off staff, some trading down (hospital networks) and some attracted to short term competitive pricing (which we believe is not sustainable). With a marginal increase in NEP, but a deteriorating loss ratio (83.5% for versus 80.6% for 2016), this resulted in a decrease in the net underwriting result of SR222m for. Operating costs decreased 5.3% due in part to lower levies but also as a result of various cost optimization efforts during the year, resulting in a lower operating expense ratio for the year (11.4% versus 12.0%). The BDP expense was significantly favourable year on year, as was investment income, which grew from SRSR130m to SR158m, mainly due to improved returns on cash and equivalents. Overall net income fell to SR501m, with a profit margin of 6.5%, versus the 8.2% of Description 2016 SRm SRm SRm % Reported results (130.1) (20.6%) Adjustment for BDP expense (31.6) (89.5%) Less Investment Income and Other Income (130.4) (157.8) (27.4) 21.0% Underlying results (189.1) (35.3%) Our Underlying results decreased by SR189m, to SR347m, which represented an underlying margin of 4.5%, compared to 7.0% for Our underlying results represent the net of premiums earned, claims incurred and operating expenses. This deterioration in the underlying results reflects the higher loss ratio reported for the year but the results still reflect a solid financial performance considering the market conditions. Page 5 of 49

6 3.2 GWP geographical analysis: Description 2016 (12months) (12months) % Central 2,618,518 2,524,883 (93,635) (3.6%) Eastern 2,539,532 2,486,353 (53,179) (2.1%) Western 2,663,465 2,589,212 (74,253) (2.8%) Other 117, ,513 15, % Total GWP 7,938,630 7,732,961 (205,669) (2.6%) We write only health insurance in Saudi Arabia and our GWP is concentrated in the main Central, Western and Eastern regions (collectively 98% of our GWP, versus 2016 at 99%). The geographical premium mix change was largely inconsequential versus 2016 with the Central and Eastern regions identical, at respectively 33% and 32%, and a minor 1% mix change between Western at 33% (versus 34%) and Other at 2% (versus 1%). In order to better illustrate the geographical mix some key accounts were reclassified from Central to Eastern during, and the 2016 geographical mix re-stated for comparative purposes. 3.3 Net claims incurred and net claims incurred ratio: Description 2016 (12 Months) (12 Months) % Net claims incurred (NCI) 6,178,445 6,405, , % Net claims incurred to NEP ratio (loss ratio) 80.6% 83.5% 2.9% 3.6% The 3.7% increase in NCI was due to medical inflation and the growth in claims not matched by increases in premium resulting in a loss ratio of 83.5%, which is higher than our historical average, and the 80.6% of 2016, but still a relatively good result given the circumstances. Page 6 of 49

7 3.4 Total operating expenses: Description 2016 (12 Months) (12 Months) % Insurance operations' operating expenses 915, ,084 (52,117) (6%) Shareholder operations' operating expenses (G&A) 7,962 11,053 3,091 39% Total operating expenses 923, ,137 (49,026) (5%) Total operating expense to NEP ratio 12.0% 11.4% (0.6%) (5%) The total operating expense ratio to NEP improved versus the prior year, reducing to 11.4%, and the absolute decrease was mainly driven by expenses related to the GWP decline and optimization in staff and marketing costs. The increase in Shareholder Operations operating expenses was mainly due to increased professional fees. The Insurance Operations expenses are described in section Total insurance operations operating expenses: Description 2016 (12 Months) (12 Months) % CCHI and SAMA levies 119, ,994 (3,085) (3%) BDP expense 35,326 3,718 (31,608) (89%) Other sales and marketing expenses 381, ,289 (6,017) (2%) Total S&M expenses-insurance operations 535, ,001 (40,710) (8%) Total G&A expenses-insurance operations 379, ,083 (11,407) (3%) Total Insurance operations operating expenses 915, ,084 (52,117) (6%) Total Sales & Marketing (S&M) expenses - Insurance operations: The CCHI and SAMA levy expenses decreased by a combined SR3.1m, due to the 3% lower GWP. The BDP expense declined to 0.4% of gross premiums receivable, versus the 3.1% of 2016, due to the excellent collection performance. The decrease in other S&M expenses of 2% was due to various cost optimization efforts during the year, mainly in staff costs and marketing expenses Total General and Administration (G&A) expenses Insurance operations: The Insurance operations G&A expense decreased 3%, mainly due to various cost optimizations, despite various additional professional fees incurred during. 3.6 Surplus from insurance operations: Description 2016 (12 Months) (12 Months) % Surplus from insurance operations 653, ,919 (150,030) (23%) The decrease in the surplus from insurance operations was mainly due to the decrease in the net underwriting result, of SR222m. Total expenses decreased by SR49m (a reduction of 5% versus the GWP decrease of 3%), through various cost optimization initiatives, and investment income increased by SR28m, leaving the surplus from insurance operations SR150m lower. Page 7 of 49

8 3.7 Investment income: Description 2016 (12 Months) (12 Months) % Insurance operations' investment income 80,188 99,668 19,480 24% Shareholder operations' investment income / (loss) 50,237 58,573 8,336 17% Total investment income 130, ,241 27,816 21% Investment income significantly increased as a result of; the favourable rates locked in during the second half of 2016 and the enhanced diversification through a higher allocation to fixed income securities, per Bupa Arabia s investment strategy. These factors improved the overall yield from the portfolio, resulting in the highest ever investment income, from both the shareholder operations and insurance operations investments, a combined increase of 21%. As with prior years, due to the challenging admissibility factors associated with higher yield investments, and the need to maintain investments in high admissibility asset classes (predominantly cash and investment grade debt instruments) we maintained a predominantly risk averse investment strategy during the year. 3.8 Description Net shareholders income: 2016 at 31/12/16 at 31/12/17 % Net shareholders' income 630, ,614 (130,091) (21%) The SR130m decrease in net shareholders income was driven mainly by a decreased surplus from insurance operations. This was due to the decrease in the net underwriting result of SR222m, which was partially offset by the decreased costs associated with lower GWP (levies and commission costs), cost optimizations, other reduced costs, and an increase in investment income. 3.9 Summary statement of financial position: 2016 Description at at % 31/12/16 31/12/17 Insurance operations' assets 4,921,382 4,949,506 28,124 1% Shareholder operations' assets 2,234,076 2,582, ,755 16% Total assets 7,155,458 7,532, ,879 5% Insurance operations' liabilities and surplus 4,921,382 4,949,506 28,124 1% Shareholders' liability 207, ,494 54,472 26% Shareholders' equity 2,027,054 2,321, ,283 15% Total liabilities, surplus and shareholders' equity 7,155,458 7,532, ,879 5% The increase in liabilities was mainly due to an increase in Shareholder s liability due mainly to additional accrued zakat and income tax provisions. Page 8 of 49

9 3.10 Total assets: Description 2016 at 31/12/16 at 31/12/17 % Total assets 7,155,458 7,532, ,879 5% The increase in total assets was due mainly to the net increase in investments of SR463m, offset by a reduction of SR96m in cash and cash equivalents. The reduction in premiums receivable, of SR110m, was offset by a SR94m increase in amounts due from insurance operations (refer sections ) Cash and cash equivalents: Description 2016 at 31/12/16 at 31/12/17 % Insurance operations' cash and cash equivalents 132, ,384 (21,646) (16%) Insurance operations' murabaha deposits 3,057,816 2,912,577 (145,239) (5%) Shareholder operations' cash and cash equivalents 93, ,500 25,700 27% Shareholder operations' murabaha deposits 987,494 1,032,806 45,312 5% Total cash and cash equivalents 4,271,140 4,175,267 (95,873) (2%) The net decrease in total cash and cash equivalents, of SR96m, was mainly driven by partially funding the growth in investments, as shown in section The amount payable to/receivable from shareholders operations is settled by transfer of cash at each reporting date and, during insurance operations transferred cash of SR421m to shareholders operations, versus SR189m in Investments: Description 2016 at 31/12/16 at 31/12/17 % Insurance operations' investments 544, , ,686 51% Shareholder operations' investments 714, , ,584 26% Total investments 1,258,420 1,721, ,270 37% In we implemented a new investment strategy of diversifying the investment portfolio for enhanced and stable investment income. The increase in investments, of SR463m during the year, was an outcome of this diversification strategy and entailed a move from deposits to other fixed income instruments (such as Sukuk and Money Market Funds) to capitalize on the improved rates. Complementing the new investment strategy was a change in accounting treatment for investment holdings, reclassifying some of the portfolio from Fair Value through Income Statement (FVIS) to Available For Sale (AFS) effective 1 January G Premiums receivable, net: Description 2016 at 31/12/16 at 31/12/17 % Total premiums receivable, net 980, ,982 (109,561) (11%) The decrease in total, gross and net, premiums receivable was due mainly to the excellent collection performance. The allowance for doubtful premiums receivable was consistent year-on-year at SR143m but the ratio to the gross premiums receivable increased slightly to 14% (2016 at 13%), due to the lower Page 9 of 49

10 premiums receivable (SR110m lower than 2016) Technical reserves: Description 2016 at 31/12/16 at 31/12/17 % Unearned premium reserves (UEP) 3,094,990 3,091,079 (3,911) 0% Claims reserves (OCP) 1,321,622 1,341,536 19,914 2% Technical reserves 4,416,612 4,432,615 16,003 0% Technical reserves closed broadly in line with the previous year, reflecting a minor overall increase of SR16m, driven mainly by a SR20m growth in the claims reserves, due to the increased loss ratio. As a result of the reduced GWP the unearned premium reserves decreased by SR4m, whilst the UEP ratio to GWP was stable at 40%, (versus the 2016 UEP ratio at 39% and 2015 at 40%). The claims reserves ratio to NCI remains extremely consistent with prior years and closed at 21%, identical to 2016, and broadly in line with 2015 at 20%. As in previous years the technical reserves were correctly estimated and provided for in accordance with SAMA's implementing regulations, and having been verified, for each quarter during the year, and for the year-end position, by the independent external actuary. 4. Statutory payments, and payable, to regulatory bodies during the year: Bupa Arabia made payments, and had amounts payable, to the various Saudi Arabian regulatory bodies as detailed within the table, and thereafter explained in the narrative, below: 4.1 Table of payments and amounts payable to regulatory bodies: Paid Paid Payable Payable Description vs SR vs SR Zakat and income taxes (to GAZT) 62,978 47,478 (15,500) 116, ,704 31,751 Levies and license fees (to CCHI and SAMA) 181, ,641 (65,925) 16,293 16, GOSI 24,338 25, ,989 2, Total 268, ,327 (80,555) 135, ,763 32, The General Authority of Zakat and Income Tax (GAZT): The total paid during the year, for Zakat and Income Tax, was SR47m being SR20m for the 2016 GAZT return (SR12m for Zakat and SR8m for Income Tax), SR26m as advance tax, and SR1m other payments (Zakat and Tax related to prior years). The SR149m payable includes a SR40m provision for the GAZT return (SR9m Zakat and SR31m Income Tax), payable in 2018, and the remainder is predominantly additional contingent provisions for Zakat matters, for the year, of SR39m, and prior years, which are under appeal. In addition to the amounts detailed and described, an additional amount of SR5m was paid during for withholding tax and SR4m has been provided in the results related to withholding tax payable in 2018 incurred in. Page 10 of 49

11 4.3 The Saudi Arabian Monetary Authority (SAMA): The total paid to SAMA was SR38,547k, comprised of SR33,116k for the first three quarters of and SR5,431k for the fourth quarter of The results include a provision for the fourth quarter of SR5,549k. 4.4 The Council for Cooperative Health Insurance (CCHI): The total paid to CCHI was SR77,094k, comprised of SR66,232k for the first three quarters of and SR10,862k for the fourth quarter of The results include a provision for the fourth quarter of SR11,098k. 4.5 The General Organisation for Social Insurance (GOSI): The total paid to GOSI during the year was SR25,208k, comprised of SR23,219k relating to and SR1,989k for An amount of SR2,412k has been provided in the results for the related GOSI amount which is payable in Tadawul (Saudi Stock Exchange) and Edaa (the Saudi Depository Centre Company (SDC)): During the Company paid SR864k (versus 2016 at SR425k) for stock exchange related services, which including SR400k to Tadawul as general service fees, SR451k for newly introduced Edaa Annual Listing Fees, and SR13k other service fees. The 2016 SR425k was paid to Tadawul and was SR400k for general service fees and SR25k for license fees. 4.7 Regulatory penalties: During the Company paid the CMA a SR100k penalty for a violation of Article (45) of the Capital Market Law, a SR55k penalty for a Labour Law breach, and a SR59k penalty to GOSI for Social Insurance. In all instances processes have been enhanced, and full staff communications issued where applicable, to ensure full compliance in future. 4.8 Approval of the renewal license from SAMA: The company s SAMA license qualification remains in place, SAMA insurance license number 20088/18/TMN, dated 10/08/2008G (09/08/1429H), having been successfully renewed previously, on 03/05/G (07/08/1438H), for a further three year period to 30/03/2020G (06/08/1441H), as announced on Tadawul on 02/05/G (06/08/1438H). 4.9 Approval of the renewal license from the CCHI: During, on 16/02/G (19/05/1438H), the company successfully renewed its CCHI license, number 3531/636, qualification for the further three year period from 16/02/G (19/05/1438H), as announced on Tadawul on 19/02/G (22/05/1438H). 5. Financial statements presentation: In compliance with the CMA s regulation dated 27/08/2008G (25/08/1429H), permitting the issuance of financial statements according to International Financial Reporting Standards (IFRS), the statements presented are in accordance with International Financial Reporting Standards ( IFRSs ) as modified by the Saudi Arabian Monetary Authority ( SAMA ) for the accounting of zakat and income tax. The Company confirms that the financial statements have not been materially affected by this practice. 6. Maintenance of proper records and books of account: As required in terms of the CMA disclosure requirement of Article 90, paragraph 39, point a), and as required by Saudi Arabian insurance regulations, the Company, and the Board, confirms that proper books of account have been maintained and that it maintains separate accounts for each of Insurance Operations and Shareholder Operations, within its accounting records, and can confirm that it has maintained proper accounting records during the financial year. 7. Unqualified opinion of the independent external auditors: The joint independent external auditors report contains an unqualified opinion that the financial statements, taken as a whole, present fairly in all material aspects the financial position of the company and that the Page 11 of 49

12 financial statements comply with the requirements of the Regulations for Companies and the Company s By- Laws. 8. Dividends and the Company s policy for the distribution of profits: As required in terms of the CMA disclosure requirement of Article 90, paragraph 24, the Company s By-Laws state the following with respect to the calculation and distribution of profits: the exclusion of Zakat and Income Tax. that 20% of net profits are allocated to form a statutory reserve. The general assembly has the authority to cease this transfer once the statutory reserve is equivalent to the paid up capital of the company. based on the Board s recommendation, the general assembly can also hold a particular percentage of the annual net profit to form a reserve and it may allocate it to purposes of its choosing. the balance shall be distributed as a first payment in the amount not less than 5% of paid-up capital to the shareholders. the remaining balance shall be distributed to the shareholders as a share in the profits or to be transferred to the retained profits account. the Board may issue a decision to distribute periodical profits to be deducted from annual profits as specified in paragraph 4 above in accordance with the relevant regulating rules issued by the concerned authorities. In addition to that stated within the Company By-Laws, during the Company approved the following as additional Dividend Policy: In addition to the distribution of profits requirements as reflected within the Company By-Laws (Articles of Association) the Company Dividend Policy is as reflected below: To distribute any excess cash as dividends to shareholders subject to: a) maintaining a solvency position in adherence to local laws and regulations at each quarter end, and, b) receiving the required regulatory and shareholder approvals for the dividend(s) wherever applicable, and, c) having accounted for the Company's requirements in meeting its Capital Management Policy and relevant Risk Management policies, which policies covering the business and investment requirements. During the Company paid SR120,000,000 cash dividends relating to fiscal year 2016, as per SAMA noobjection letter number , representing SR1.50 per share, 15% of the nominal share value. The below table illustrates Bupa Arabia s recent Dividend history: Dividends for the Fiscal Years * 2015* 2016 Description Retained Income (pre-zakat & Inc. Taxes) 134, , , , ,705 Dividend Amount 40,000 20,000 N/A 160, ,000 Pre-Zakat & Inc. Taxes Dividend Pay-out Ratio 29.8% 13.6% N/A 24.8% 19.0% Number of Shares in Issue 40,000 40,000 40,000 80,000 80,000 Saudi Riyals Dividends per Share N/A % of Dividend/Year/Quarter Distributed 100% 2013Q2 100% 2014Q2 N/A 100% 2016Q2 100% Q2 *SR400 million of the 2014 retained earnings was used in 2015 to double Bupa Arabia s share capital to 80,000,000 shares, through issuing one bonus share for every share held. Page 12 of 49

13 9 Key other functional activities during the year: 9.1 Our proposition and marketing: Brand and brand proposition: During we launched the new Bupa Arabia brand proposition, with three key pillars, reinforcing what we stand for as the leading health insurance provider in Saudi Arabia. The three key pillars are: a) Global Expertise and Reach: Bupa s global network and reach enables us, as Bupa Arabia, to extract best practices and global medical guidelines from all around the world, and implement them in Saudi Arabia. Therefore, we continuously strive to combine our global expertise and capabilities with our in-depth local knowledge of our local customers needs, all to ensure that we are able to offer all our members the very best in healthcare products and services. b) Life-touching Healthcare Services: In our commitment to offer our members unique healthcare services that add real value to their lives, we created the Tebtom healthcare program to help all our members and their families feel taken care of by our team members. The Tebtom program provides tangible services to all our members and which go well beyond health insurance, such as the medication refill and home delivery services for chronic patients, and also the home vaccination service for children. Our doctors are also available to facilitate, through authorised third parties where appropriate, quick and immediate answers, to questions about their personal, and their families, medical needs. c) Exceptional Experiences at Hospitals: We created the Rahatkom program, a significant enhancement of our previous Point-of-Care (POC) program. This involved physically transforming nearly 40 offices, led by almost 70 Bupa Arabia delegates, at top hospitals across the Kingdom. It makes members feel secure and well taken care of by guiding them, catering for their needs, and making their hospital visits easier, faster and less stressful (and even includes mobile hospital delegates to help our members where it matters the most). Additionally we positioned experienced Bupa Arabia doctors across top hospitals to represent our members with the hospitals physicians. This Rahatkom program now offers our members distinct service excellence competencies such as; Bupa Arabia Hospital Delegates, Clinical Excellence and Continuity of Care. Hospital visit times can be reduced by over 50% through our Rahatkom program and it continues to support our commitment to stand out and to be there when and where it matters the most. During Bupa Arabia was ranked the number one most powerful insurance brand, and the overall eighth most powerful Company brand, in Saudi Arabia, through the Brand Z brand ratings of. 20 th Anniversary: During we celebrated the 20th anniversary of our operational presence in Saudi Arabia and used this opportunity, as the leading health insurance provider, to highlight our strong heritage through a 20 th anniversary campaign providing appreciation to our clients, employees, and other key stakeholders. The key asset of the external campaign was a 20 th anniversary video which showcased our leaders/representatives, highlighting our 20 year journey, and was accompanied by a full social media campaign thanking our clients (which achieved +3.2 million video views and provided excellent public relations coverage). Strategic Health Partnerships (SHP): Bupa Arabia continued to leverage its strategic partnerships, with the Al-Ittihad and Al-Hilal football clubs, to drive its healthcare programs, services and CSR orphan campaigns. We used star players from both clubs to endorse both the Tebtom and Rahatkom programs services, through dedicated marketing campaigns, and we also continued investing in improving our value proposition by focussing on unmatched healthcare services. Page 13 of 49

14 TPA Services activities: During Bupa Arabia progressed a number of activities in support of fulfilling the regulatory and client requirements of TPA Services during Our corporate social responsibility (CSR): Bupa Arabia continued its promise to help, change and support the lives of all orphans under the supervision of the Ministry of Labour and Social Development (MLSD). is the seventh successive year of providing free health insurance and medical cover to the orphans living in the orphanages under the MLSD, in 46 orphanages kingdom wide, across 13 cities. During the orphans also visited both Al-Ittihad and Al-Hilal where they experienced once-in-a-lifetime opportunities to meet the players at the clubs centres, experience match-days and receive player autographed club memorabilia. Also, to ensure our employees and our community remain engaged with our CSR activities, we donated more than 74,000 items to charities registered under the Ministry, for distribution to disadvantaged families as part of the Ministry s Ramadan program. 9.3 Our operations, customer service and total quality management (TQM): We continue to invest in our service delivery by continuously enhancing our capabilities, systems and service proposition, and our operations unit succeeded with the following significant outcomes during the year: improved Net Promoter Score (NPS) to a record high of 65% (versus 57% for 2016) Customer Satisfaction continued at a record high of 90% (versus 86% for 2016) continued to strengthen the Health Care Operations (HCO) differentiation through more focused services and touched more than 1.6m customers, built new capabilities in claims processes through the Health Risk Management (HRM) initiative Total Quality Management (TQM) quality assurance continued to drive quality index improvements completed the Lean management concept on SME, resulting in the halving of cycle times and significantly increasing staff productivity, and which we will continue to expand the lean process design throughout 2018, A strong focus on claims costs resulting in our bending the medical inflation curve continued to strengthen the service platform Up Your Service Passion focusing on cultural and service excellence activities. 9.4 Our technology: In support of Bupa Arabia s business strategy the Technology Services & Business Transformation (TSBT) team provided technological business support for key solutions based on a clear strategy of viable solutions: infrastructure modernization projects resulted in a high stability of our infrastructure and operational environment, and supported establishing a record general systems availability of close to 100%. systems have been implemented to support Bupa Arabia s strategy and business: developed and Implemented VAT systems requirements developed and implemented Aramco TPA systems requirements, enabling readiness for the launch of Aramco TPA related services. developed and implemented the Tebtom Digital platform. developed further automation of analytical dashboards covering most key business areas (Tableau). continued implementing Microsoft Dynamics for financial ERP (AX) (covering budget/purchasing processes). implemented a new Sales Commission System (IBM). implemented self-service staff systems provisioning developed, for early 2018 implementation, an E-commerce platform, based on enhanced processes and design Page 14 of 49

15 A major focus remains our new Customer Relationship Management (CRM) system, of which several key modules were deployed and others will continue to be progressed and implemented throughout The HRM initiative is fully supported through advanced and predictive analytics and incorporates over 700 medical rules which have been integrated into the HRM solution. TSBT has also supported new regulatory requirements, including SAMA s recent requirements on IT governance and Cyber security. In addition to implementing Bupa Arabia s enhanced Digital strategy during 2018, TSBT will also focus on extending the use of systems to drive efficiencies and increase customer satisfaction. 9.5 Our people: We continue to create a high performance based culture by empowering and engaging our employees and we believe that attracting, retaining and developing talented, competitively compensated, employees will better serve our clients. During we implemented a variety of initiatives that impacted the Company positively and will support sustainable business results. We maintained our Platinum status in Nitaqat (the Saudisation program of the Saudi Ministry of Labour) through a constant focus on attracting, and retaining, top Saudi talent and which supported an increase in our Saudisation level to almost 72% (refer section 10.6). During we attracted over 500 new employees, carried out a variety of focussed training and development programs, and continued to develop our talent and succession planning programs, facilitating the future internal mobility of our leaders. We continue to promote the development and employability of our Saudi youth, through our Future Leaders Program. The program has a number of well qualified Management Associate Trainees currently undergoing on-the-job training in a variety of Bupa Arabia s functions. During we accepted a further intake to the program, which has the ultimate aim of identifying and developing talented young Saudi nationals who have the potential to fill future Bupa Arabia leadership roles. We also achieved a Mowaamah Silver Certificate in recognition for our efforts in creating a caring culture involving employees with special needs. We also ranked 13th in the Great Place to Work in Saudi Arabia annual survey. 9.6 Our Chief Executive Team (CET): During the CET changed through the addition of a Chief Sales Officer, a new Chief Human Resources Officer joining, and a change of role of the Chief Commercial Officer to Chief Business Development Officer. The CET, at the end of the financial period, comprised: Chief Executive Officer, (CEO) Tal Nazer (Saudi) Mr. Tal Hisham Nazer has been CEO of Bupa Arabia since Leading this top and fast growing specialized health care company to higher standards, his relationship circle has widened and strengthened in the insurance market in Saudi Arabia with regulators, healthcare providers and the insured. Mr. Tal Nazer is a Board member on various companies and committees. He is a Board member of Nawah Healthcare and a member of the Executive Insurance Committee. Mr. Tal Nazer is also a member of the Young Presidents Organization (YPO) and a member of Young Global Leaders (YGL). He joined Choate s Board in New York in Mr. Tal Nazer holds an MBA from The Wharton School, Pennsylvania, USA (in Finance and Buyouts, completed in 2001) and a BA in Economics from the University of California at Los Angeles (completed in 1996). Page 15 of 49

16 Chief Financial Officer, (CFO) Nader Ashoor (Saudi) Mr. Nader Ashoor has more than 15 years finance experience and joined Bupa Arabia, in 2016 as CFO, having spent over 14 years with Saudi Aramco, with whom he undertook a variety of professional, supervisory and leadership roles. Nader s last role at Saudi Aramco was as Director, Finance readiness-ipo. Nader also served as a Board investment committee member of the Saudi Aramco Entrepreneurship Ventures Company. Nader holds an MBA degree, achieved with distinction, in leadership from IMD International, Lausanne, Switzerland, and a Bachelor s degree in Accounting (first class honours) from KFUPM. Nader also holds the CMA and CIA certifications, and has successfully completed the CPA rigorous examination requirements. He has been the recipient of multiple renowned awards, including the IMA s Distinguished Performance Award and the IIA s William S. Smith Certificate of Honour Award. Chief Business Development Officer, (CBDO) Ali Sheneamer (Saudi) Ali Mohammed Sheneamer has over 20 years collective experience in marketing, sales and general management of which 5 years in Saudi health insurance, having joined in 2013 as Chief Commercial Officer. Ali has served, before joining Bupa Arabia, as the Deputy Governor and Chief Operating Officer of SAGIA for five years. Prior to this Ali was employed as group marketing head at the National Commercial Bank for two years and in various marketing assignments at Procter & Gamble for eight years. Ali currently serves as a board member of Baazeem Trading Company (a publicly traded Saudi secondary market company) and as a member of the SAMA health insurance sub-committee. Ali holds a Bachelor s degree in science (computer engineering) from King Abdulaziz University, Saudi Arabia. Chief Human Resources Officer, (CHRO) Tariq Alamoudi, (Saudi) Mr. Tariq Alamoudi joined during the year and prior to that was responsible for a variety of HR leadership roles at global and regional levels at Procter & Gamble (P&G). Tariq was the P&G Saudi Arabia leader and also led the HR/Organizational development for the Global Development Organization (GDO), on assignment at P&G headquarters in Switzerland, which had a worldwide reach. Prior to that, he held key roles at Tetra Pak in business development, KPMG in People Consulting and AIESEC (Australia) in leadership development. Tariq established his own executive HR consultancy, providing executive leadership hiring and assessment services to major companies in Saudi. Tariq holds an MBA degree in Strategy and HRM from Griffith Business School and a Bachelor s degree in Marketing Management from Griffith University, Australia. He has completed executive programs in leadership, strategy and innovation from IMD, Switzerland. Chief Operations Officer, (COO) Arif Hunashi Mr. Arif Hunashi joined Bupa Arabia during 2014, as COO, and before this worked for Unilever Arabia for 15 years, 10 years of which was at a Director level, and covering a number of General Manager and Customer Development Director roles across the Middle East (including Saudi Arabia, UAE, Oman, Bahrain and Qatar). Arif also previously worked more than four years in two leading Saudi family businesses as the Managing Director (Distribution) and COO. Arif holds an MBA in Marketing from the University of Leicester, UK (2005), and a Bachelor of Engineering in Instrumentation & Control from the University of Teeside, UK (1993). Arif is also a Chartered Electrical Engineer, Institute of Electrical Engineering, UK (2002). Chief Risk Officer, (CRO) Ali Fawzi Hamdan Mr. Ali Hamdan joined Bupa Arabia in January 2016, as a CRO, bringing more than 15+ years of risk management and advisory experience, which capitalizes on multifaceted industry knowledge and significant exposure in leading multicultural teams. Prior to joining Bupa Arabia, Ali was the Middle East, North Africa and Turkey Chief Audit Executive for General Electric for almost four years. Ali also spent three years with Dubai Holding as the Head of Risk Management and Internal Audit for its subsidiary Sama Dubai, based out of Dubai, UAE. Prior to that, Ali worked for Deloitte and Andersen in the Enterprise Risk Services and Assurance & Business Advisory Services, respectively. Ali holds an Executive MBA degree (2015) from London Business School and a Bachelor s degree in Business Administration (2001) from the American University of Beirut in Lebanon. Ali also holds the CIA and CCSA certifications. Page 16 of 49

17 Chief Sales Officer, Atef Mufti (Saudi) Mr. Atef Mufti joined during and prior to that was the Chief Commercial Officer, and a member of the Board of Directors, of Panda Retail Co. for six years and in which role he was responsible for all the commercial buying and supply chain of Panda s business in KSA, the UAE and Egypt. Atef began his career with Saudi British Bank (SABB) in 1995 and spent more than 12 years working in the banking industry and, during which tenure, he held senior management roles in branch network, sales and customer services. He thereafter assumed Executive roles as the Deputy General Manager, Personal Financial Services, responsible for all sales functions (branch, direct sales, financial planning and Takaful sales) in KSA. He was Managing Director for the Saudi Distribution Company (part of the Saudi Research & Marketing Group) followed by two years as the Western Region General Manager for Bank Al Bilad. Atef holds a Bachelor s degree in Marketing from the King Fahad University of Petroleum and Minerals with a minor degree in Management. Chief Strategy Officer, (CSO) Fraser Gregory Mr. Fraser Gregory has more than 20 years health experience (Insurance, Hospitals and Medical Services) since joining Bupa in its UK operation during 1995 he held a variety of senior finance roles covering; Bupa Group Financial Controller (integrating 2.0b sterling of acquisitions), Bupa Hospitals Finance Director (sold business to private equity in 2007 for 1.4b sterling) and also Bupa Insurance CFO for a handful of years. Prior to Bupa, Fraser had 10 years experience with Diageo (Brands and Wholesale Drinks), Lloyds Bank (Debit and Credit card business) and STC (Telecoms component manufacturer). Fraser is a qualified accountant (Fellow of the Chartered Institute of Management Accounts - CIMA) and holds a Bachelor s degree in Finance and Commerce (University South Bank, London, UK, 1982), a Diploma in Managed Care (Leeds University, UK, 1998) and an Executive mini MBA (Wharton, USA 2001). Fraser joined Bupa Arabia as CFO during 2010 and moved into the CSO role at the end of Bupa Arabia s significant plans, decisions and developments during the year: Certain elements of Bupa Arabia s significant plans, decisions and developments, during, are detailed within this section whilst others are described throughout this ABR Our Strategy review: Bupa Arabia's strategic vision is aligned with the Kingdom s 2030 Vision for healthcare: Bupa Arabia is the greatest healthcare company in the Arab world. It is designed to deliver on its purpose. When it touches you, whether you are an employee, a customer or a community member, you live a longer, healthier, happier life. We have written history. At the heart of this vision is for Bupa Arabia to keep building its status as a healthcare partner to millions of people in Saudi Arabia. We aim to provide health insurance that leads the market in unlocking wider access to affordable, high-quality healthcare. As the largest health insurance company in the Kingdom, Bupa Arabia provides: Global expertise and reach, being part of the largest healthcare network in the world outside of the US and with over 70 years of experience. A drive to shift the healthcare industry to a patient-centric, outcomes-focussed paradigm. We provide life-touching healthcare services with our Tebtom program and care when needed most, in hospitals, with our Rahatkom program. Partnerships with government and other stakeholders in Saudi society to tackle the most pressing healthcare needs, subject to the legal and regulatory environments. At Bupa Arabia, we believe in the service profit chain and know that extraordinary business performance cannot be delivered without a healthy and highly engaged workforce; hence we strive to attract and retain talented, skilled and engaged employees who love working at Bupa Arabia because of our amazing culture, which we define on five dimensions: Page 17 of 49

18 We are leaders in all we do, We have an innovative and caring culture, We are loved by customers, We have amazing talent, We consistently act according to our values. We have made steady progress in delivering our strategy in, in what was a turbulent market, with a difficult economy, competitive pricing pressures and a more demanding regulatory environment, and despite this we have delivered a very robust financial performance, and our aim is to continue on this impressive trajectory in 2018, with a key pillar being to improve margins through more robust targeted pricing. In addition, our top strategic priorities are: To strengthen our distribution; o In particular, to continue to develop our product proposition to better serve the Small Medium Enterprises (SME) segment, a lower priced segment where we see potential for significant growth. To better serve our members; o To continue building our differentiation as the leading provider of health insurance in Saudi Arabia. In 2018, our key focus in this area will be to work with providers to ensure our customers get the best possible service when they receive medical care. We will extend our Rahatkom hospital delivery program, providing very visible and accessible personnel on the ground to support and advise our members at the time of their greatest need. o To protect our leadership position by maintaining strong bonds with our significant customer base, proactively streamlining, automating and deepening our retention services across all channels. o Health Risk Management (HRM): we will also be leveraging best practice from other Bupa worldwide businesses and will be upgrading our capabilities by automating the receipt, processing and adjudication of claims. The rules engine we are developing will increasingly allow us to identify and tackle fraud and abuse in real time, as well as build efficiency and scalability. o To continue improving our IT capabilities by providing new technologies to underpin our continued business growth. We continue to deploy a new CRM platform in 2018, and continue to build on this with a Lean program in 2018 to review and improve our key processes. We believe we can reduce cycle times to improve customer outcomes and satisfaction, plus reduce unit operating costs and give us more scalability for the future. In light of the prevailing regulatory enforcement drive, we will also continue to; o Enhance the sustainability of the Company s governance and oversight through improving Bupa Arabia as a Risk Intelligent Organisation via: mature: Company Secretariat, Cyber Security and Technology Risk (including business continuity management), Risk Management, and Legal Affairs and Corporate Governance practices, comprehensive policies and procedures through a world-class Enterprise Policy Management Framework, and business enabling and reliable independent and objective independent functions in the form of our Compliance and Internal Audit functions. o Proactively accelerate our readiness to meet the key new regulatory requirements, such as the SAMA Risk Based Supervisory (RBS) Framework, SAMA Cyber Security Framework, SAMA Customer Service requirements, and the CMA Corporate Governance regulations. o For more details on governance related activities/plans please refer to the detailed governance sections in this report. During Bupa Arabia was ranked the number one Saudi insurance company, and the overall 6 th ranked company in Saudi Arabia, in the Corporate Governance Index (CGI) rankings, at the AlFaisal University s first Annual Corporate Governance Conference, for strong Corporate Governance practices during 2015 (a award). Page 18 of 49